What is Equity? Meaning, Types & Examples

The Core Meaning of Equity in Finance

The word 'equity' comes from the Latin word aequitas, meaning fairness or equality. In modern finance, it has evolved to carry a very specific and layered meaning that varies slightly depending on the context in which it is used.

In its most general financial sense, equity is the value that remains after you subtract all liabilities from all assets. Think of it this way: if a person owns a house worth ₹80 lakh but has an outstanding home loan of ₹50 lakh, the equity in that house is ₹30 lakh. That is the actual value the homeowner 'owns' outright. The same logic applies to businesses. A company's total equity - often called shareholders' equity or net worth - is simply the difference between its total assets and its total liabilities as recorded on the balance sheet.

In the stock market context, equity takes the form of shares or stocks issued by a company. When a private company decides to raise capital from the public, it goes through a process regulated by SEBI (Securities and Exchange Board of India) to list its shares on a recognised stock exchange such as the NSE or BSE. Investors who buy these shares become shareholders - that is, part-owners of the company - and the collection of all such shareholders forms the equity base of that company.

Equity is often contrasted with debt. Both are ways for a company to raise money, but they are fundamentally different. Debt involves borrowing money that must be repaid with interest, regardless of how the business performs. Equity, on the other hand, does not create a repayment obligation. Instead, the investor's return comes from dividends (a share of profits declared by the company) and capital appreciation (an increase in the market value of the shares). However, if the company performs poorly, shareholders may receive little or nothing - and in the worst case, if the company is liquidated, equity holders are the last in the repayment queue, after all creditors and debt holders.

This characteristic - being last in the priority order during liquidation - is why equity is inherently riskier than debt. But it is also why equity historically offers higher long-term returns. Investors demand a higher potential reward to compensate for the higher risk they take on by becoming shareholders. This relationship between risk and return is one of the foundational principles of finance, and equity embodies it perfectly.

In accounting, shareholders' equity on a balance sheet is broken down into several components: paid-up share capital (the money raised by issuing shares at face value), securities premium (amounts received above face value), retained earnings (profits accumulated over time and not distributed as dividends), and other reserves. Together, these components tell you the book value of equity in a company. However, the market value of equity - derived by multiplying the share price by the total number of shares outstanding - is almost always different from book value, sometimes dramatically so, reflecting investor expectations about future growth and profitability.

Types of Equity: A Detailed Breakdown

Equity is not a monolithic concept. It appears in several distinct forms, each with different characteristics, rights, and risk profiles. Understanding these types is essential for investors navigating the Indian stock market.

Ordinary Shares (Common Shares or Equity Shares)

Ordinary shares, often simply called equity shares in India, are the most common type of equity instrument. When people talk about buying shares of a company on the NSE or BSE, they are almost always referring to ordinary shares. Holders of ordinary shares enjoy voting rights on key corporate decisions - such as the appointment of directors, approval of major transactions, or changes to the company's articles of association. They also have the right to receive dividends, though dividends on ordinary shares are not guaranteed. The company's board of directors decides whether to declare a dividend and what amount to distribute, based on the company's profitability and capital requirements. In the event of the company being wound up, ordinary shareholders receive whatever remains after all creditors, bondholders, and preference shareholders have been paid - which may be nothing at all.

Preference Shares

Preference shares occupy an interesting middle ground between equity and debt. Like equity, they represent ownership in the company, but like debt, they typically offer a fixed dividend. Preference shareholders receive their dividends before ordinary shareholders, and in a liquidation scenario, they have a higher claim on the company's assets than ordinary shareholders (though they still rank below debt holders). Preference shares generally do not carry voting rights, though there are exceptions. In India, SEBI and the Companies Act, 2013 govern the issuance and classification of preference shares. They come in several sub-varieties:

- Cumulative preference shares: If the company does not declare a dividend in a particular year, the unpaid dividend accumulates and must be paid before any dividend is distributed to ordinary shareholders. - Non-cumulative preference shares: Unpaid dividends do not carry forward. - Convertible preference shares: Can be converted into ordinary shares after a specified period or event. - Redeemable preference shares: The company repurchases them at a predetermined price after a fixed period. - Participating preference shares: Allow holders to participate in surplus profits after ordinary shareholders have received a specified return.

Sweat Equity Shares

Sweat equity shares are issued by a company to its employees or directors at a discount or for non-cash consideration, in recognition of the value they have added to the company through their work, expertise, or intellectual property. In India, the issuance of sweat equity shares is governed by the Companies Act, 2013 and related SEBI regulations. These are particularly common in startups and early-stage companies where cash compensation may be limited but founders want to incentivise key talent.

Employees' Stock Options (ESOPs)

While not equity per se at the time of grant, ESOPs give employees the right (but not the obligation) to purchase company shares at a pre-determined price (called the exercise price or strike price) after a specified vesting period. When exercised, ESOPs result in the issuance of new equity shares to the employee. ESOPs align the interests of employees with those of shareholders and are a powerful tool for attracting and retaining talent. In India, listed companies must comply with SEBI (Share Based Employee Benefits) Regulations when offering ESOPs.

Private Equity

Private equity refers to ownership stakes in companies that are not publicly listed on a stock exchange. Private equity investments are typically made by institutional investors, high-net-worth individuals, or dedicated private equity funds. These investments are illiquid - you cannot simply sell them on an exchange - and usually require a long holding period. In India, private equity plays a significant role in funding startups, mid-sized businesses, and turnaround situations.

Home Equity and Real Asset Equity

Beyond the stock market, the concept of equity applies wherever assets are financed partly by debt. Home equity, as discussed earlier, is the portion of a property's value that the owner truly 'owns' after accounting for any mortgage. This concept extends to any asset - a vehicle, a piece of machinery, or a commercial property - where the residual value after debt represents the owner's equity.

Shareholders' Equity on the Balance Sheet

For anyone serious about understanding how equity works, the balance sheet is the most important document to study. The balance sheet of a company is a snapshot of its financial position at a given point in time, showing what it owns (assets), what it owes (liabilities), and what belongs to shareholders (equity). The fundamental accounting equation that governs every balance sheet is:

Assets = Liabilities + Shareholders' Equity

Rearranging this, Shareholders' Equity = Assets − Liabilities

This deceptively simple equation contains an enormous amount of information about a company's financial health.

Components of Shareholders' Equity

Share Capital: This is the total amount raised by the company through the issuance of shares, valued at face value (also called par value). In India, the face value of shares is commonly ₹1, ₹2, ₹5, or ₹10, as specified in the company's memorandum. The total authorised share capital is the maximum amount the company is legally permitted to raise, while the paid-up capital is what has actually been collected from shareholders.

Securities Premium (Share Premium): When shares are issued at a price above their face value - which is almost always the case in a public offering - the excess over face value goes into the securities premium account. For example, if a company issues shares with a face value of ₹10 at an issue price of ₹200, the ₹190 per share above face value is credited to securities premium. This account has specific uses under the Companies Act, 2013 - it can be used to issue bonus shares, write off preliminary expenses, or provide for the premium payable on the redemption of debentures or preference shares.

Retained Earnings and Reserves: Retained earnings are the accumulated profits that the company has not distributed as dividends. Over time, for a profitable company, retained earnings can become the largest component of shareholders' equity. Reserves are similar in nature - companies may create specific reserves for purposes like dividend equalisation, capital redemption, or general corporate purposes.

Other Comprehensive Income: Under modern accounting standards (India follows Indian Accounting Standards, or Ind AS, for listed and larger companies), certain gains and losses - such as revaluation gains on property or fair value changes in certain financial instruments - are recorded directly in equity without passing through the profit and loss account. These are captured under 'Other Comprehensive Income' and form part of total equity.

What Does Negative Equity Mean?

If a company's liabilities exceed its assets, shareholders' equity becomes negative. This is a serious warning sign that the company may be in financial distress. For investors, negative equity often signals that the company has been consistently loss-making, has taken on too much debt, or has experienced a significant write-down of assets. While negative equity does not automatically mean the company will collapse - some businesses operate with negative book equity and still generate positive cash flows - it warrants very careful analysis.

Book Value Per Share

Dividing total shareholders' equity by the number of outstanding shares gives the book value per share. This metric tells you what each share would theoretically be worth if the company were liquidated at the values shown on its balance sheet. In practice, market prices diverge significantly from book value because markets reflect future expectations, not just historical cost. The ratio of market price to book value (the Price-to-Book or P/B ratio) is a widely used valuation metric in fundamental analysis, particularly for banks and financial companies in India.

How Equity is Created and Issued: The Indian Market Process

Equity does not appear out of nowhere. It is created through a structured legal and regulatory process that, in the Indian context, involves SEBI, the NSE or BSE, depositories like NSDL and CDSL, and a chain of intermediaries including investment bankers, registrars, and brokers.

Starting with a Private Company

Most companies begin their lives as private limited companies, with equity held by a small group of founders, family members, or early investors. At this stage, equity is not freely tradeable - any transfer of shares requires compliance with the company's articles of association and the Companies Act, 2013. The equity at this stage is essentially 'private equity.'

Venture Capital and Private Equity Investment

As the company grows, it may attract investment from venture capital funds or private equity investors who take an equity stake in return for capital. Each such funding round (typically referred to as Series A, Series B, and so on) results in the issuance of new shares, diluting the existing shareholders' percentage ownership but (ideally) increasing the overall value of the company.

Initial Public Offering (IPO)

When a company decides to list its shares on a public stock exchange and offer them to the general public for the first time, it undertakes an Initial Public Offering (IPO). In India, an IPO is a highly regulated process overseen by SEBI. The company must file a Draft Red Herring Prospectus (DRHP) with SEBI, which scrutinises the document for completeness and accuracy before allowing the company to proceed. The IPO prospectus contains detailed information about the company's business, financials, risks, and the terms of the offer.

IPOs in India can take the form of a Fresh Issue (where new shares are created and issued, with proceeds going to the company) or an Offer for Sale (where existing shareholders sell their shares, with proceeds going to them rather than the company). Often, an IPO is a combination of both.

The IPO process is conducted through SEBI-mandated intermediaries - Book Running Lead Managers (investment banks), registrars, and underwriters. Once SEBI grants approval, the company opens the IPO for subscription by retail investors, qualified institutional buyers (QIBs), and non-institutional investors (NIIs). After the subscription period, shares are allotted, and within a specified number of days, the shares begin trading on the NSE and/or BSE.

Follow-on Offerings and Rights Issues

After listing, a company can raise additional equity capital through various mechanisms. A Follow-on Public Offer (FPO) involves issuing new shares to the public. A Rights Issue allows existing shareholders to buy new shares at a discount to the prevailing market price, in proportion to their current holdings. A Bonus Issue involves distributing additional shares to existing shareholders free of cost, funded from accumulated reserves. Each of these corporate actions affects the equity structure of the company.

The Role of Depositories

In India, shares exist in electronic (dematerialised) form and are held in Demat accounts maintained by depositories - NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). When you buy shares through your broker, the shares are credited to your Demat account. This system has eliminated the risks associated with physical share certificates - forgery, loss, damage - and has made equity investing far more accessible and secure.

Equity vs. Debt: Understanding the Fundamental Difference

One of the most important conceptual distinctions in all of finance is the difference between equity and debt. Both are tools for raising capital, but they differ profoundly in their nature, implications for the issuer, and risk-return profile for the investor.

From the Company's Perspective

When a company raises money through debt - by issuing bonds or debentures, or by taking a bank loan - it creates a contractual obligation. The company must pay interest at the agreed rate and repay the principal at maturity, regardless of whether it made a profit or a loss. Debt holders are creditors; they do not own any part of the business, and they have no say in day-to-day management (unless the company defaults, in which case creditors may have certain rights under the Insolvency and Bankruptcy Code, 2016).

When a company raises money through equity, no such repayment obligation is created. The investors become owners. The company has discretion over whether to pay dividends or retain earnings for reinvestment. This financial flexibility makes equity an attractive source of capital, particularly for companies with uncertain or lumpy cash flows.

However, equity financing has its own costs. Issuing new shares dilutes the ownership percentage of existing shareholders. It also creates expectations - shareholders demand returns, whether through dividends or capital appreciation, and management is accountable to them through the board of directors and through regulatory mechanisms overseen by SEBI.

From the Investor's Perspective

Debt instruments such as fixed deposits, bonds, or government securities typically offer a predictable, fixed income stream. The principal is generally secure (subject to the creditworthiness of the issuer), and the investor knows in advance what return to expect. This predictability makes debt suitable for conservative investors or for the portion of a portfolio dedicated to capital preservation.

Equity, in contrast, offers no guaranteed return. The investor's reward depends entirely on how the business performs. In the best case, a growing, profitable business can deliver returns far in excess of any fixed-income instrument over a long period. In the worst case, the investor can lose their entire investment. Historically, equity as an asset class has outperformed debt over long holding periods in India (and globally), but this has come with significant volatility along the way.

The Concept of Leverage

When a company uses both debt and equity to finance its operations, it is said to be 'leveraged.' The ratio of debt to equity (D/E ratio) is a key measure of financial risk. A highly leveraged company has a large proportion of debt relative to equity. This amplifies returns in good times - because profits are distributed to a smaller equity base after paying fixed interest - but also amplifies losses in bad times. Understanding a company's leverage is a critical part of fundamental analysis for equity investors.

Hybrid Instruments

In practice, the line between equity and debt is not always clear. Certain financial instruments - convertible debentures, non-convertible debentures with equity warrants, compulsorily convertible preference shares - have features of both. These hybrid instruments add complexity to balance sheet analysis and require careful interpretation by investors.

Equity Returns: Dividends and Capital Appreciation

When you invest in equity, there are two primary ways to earn a return: dividends and capital appreciation. Understanding both is crucial for setting realistic expectations and evaluating investments.

Dividends

A dividend is a distribution of a portion of the company's profits to its shareholders. In India, dividends are declared by the company's board of directors and approved by shareholders at the Annual General Meeting. Dividends are expressed either as a percentage of the face value of the share or as a fixed rupee amount per share.

For example, a company with shares having a face value of ₹2 might declare a dividend of ₹5 per share. If you hold 500 shares, you would receive ₹2,500 as dividend income. Dividends are not obligatory - the board may choose to retain profits for reinvestment - and they are not tax-free in the hands of the investor. As per recent Indian tax law (refer to the latest Finance Act for current rates and provisions), dividends are taxable as income in the hands of shareholders.

Dividend yield - calculated as the annual dividend per share divided by the current market price, expressed as a percentage - helps investors compare the income-generating potential of different stocks. Companies in mature, stable industries with limited reinvestment opportunities tend to pay higher dividends (called 'income stocks'), while fast-growing companies typically reinvest most of their profits and pay little or no dividend (called 'growth stocks').

Capital Appreciation

Capital appreciation - the increase in the market price of a share over time - is the other major source of return from equity investment. If you buy a share at ₹500 and the price rises to ₹750 over two years, you have achieved capital appreciation of ₹250 per share, or 50%. This appreciation is realised only when you sell the shares.

Capital appreciation is driven by a combination of factors: improvement in the company's fundamental performance (growing revenues, expanding margins, stronger cash flows), re-rating of the company's valuation multiples (investors willing to pay more per rupee of earnings), macroeconomic tailwinds (sectors benefiting from government policy, favourable interest rate cycles), and broader market sentiment.

Total Return

The total return from an equity investment is the combination of dividend income and capital appreciation. Over long periods, for high-quality businesses, the compounding effect of total returns can be remarkable. This is the foundation of wealth creation through equity investing - the power of compounding, where reinvested dividends and appreciation generate further returns over time.

Tax Treatment of Equity Returns in India

Equity investments in India have specific tax implications that investors must understand:

- Short-Term Capital Gains (STCG): Profits from selling equity shares held for less than 12 months are subject to STCG tax. Refer to the latest Finance Act for the applicable rate. - Long-Term Capital Gains (LTCG): Profits from selling equity shares held for more than 12 months exceed a specified threshold are subject to LTCG tax. Refer to the latest Finance Act for current exemption limits and rates. - Dividend Income: As mentioned, dividends are taxable in the hands of investors at their applicable income tax slab rate under current provisions. Consult a qualified tax professional for personalised advice. - Securities Transaction Tax (STT): Whenever you buy or sell equity shares on a recognised Indian stock exchange, STT is levied. This is collected at source and is not the same as capital gains tax.

Investors should consult a qualified chartered accountant or tax professional for specific tax guidance relevant to their individual circumstances.

Reading Equity in the Context of the Indian Stock Market

For retail investors in India, interacting with equity primarily means engaging with the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). These two exchanges, regulated by SEBI, are the pillars of India's equity market ecosystem. Understanding how equity functions within this ecosystem - from market indices to trading mechanisms - brings the concept to life.

Stock Market Indices as Equity Barometers

Indices like the Nifty 50 (NSE's benchmark index of 50 large-cap stocks) and the Sensex (BSE's benchmark of 30 major stocks) represent the collective performance of a select basket of equity shares. These indices are market-capitalisation weighted, meaning that companies with larger market caps exert more influence on the index level. When investors say 'the market went up 1% today,' they are typically referring to movements in these benchmark indices.

Beyond the benchmark indices, there are sectoral indices (like the Nifty Bank, Nifty IT, Nifty Auto), broad-market indices (like the Nifty 500), and thematic indices. These provide investors with a way to gauge the performance of equity in specific segments of the economy.

Market Capitalisation and Equity

Market capitalisation (or market cap) is the total market value of a company's equity. It is calculated by multiplying the current share price by the total number of shares outstanding. Market cap is used to classify companies into: - Large-cap: Top 100 companies by market cap (SEBI's classification) - Mid-cap: 101st to 250th companies by market cap - Small-cap: 251st onwards

This classification matters because different market-cap segments have different risk-return characteristics. Large-cap equity is generally considered more stable, with better liquidity and analyst coverage. Small-cap equity tends to be more volatile and less liquid, but also potentially offers higher growth opportunities.

Equity Valuation Metrics

In the Indian stock market, several metrics are used to assess whether equity is attractively or expensively priced:

- Price-to-Earnings (P/E) Ratio: The share price divided by earnings per share. A high P/E suggests that the market expects strong future growth; a low P/E may indicate undervaluation or poor growth prospects. - Price-to-Book (P/B) Ratio: Market price per share divided by book value per share, as discussed earlier. - Earnings Per Share (EPS): Net profit divided by the number of outstanding shares - a direct measure of how much the company earns for each unit of equity. - Return on Equity (RoE): Net profit divided by total shareholders' equity, expressed as a percentage. RoE measures how efficiently management uses equity capital to generate profits. A consistently high RoE is generally a sign of a well-managed, competitive business.

Liquidity and Equity Trading

One of the great advantages of publicly listed equity over other asset classes like real estate or private equity is liquidity. Shares listed on the NSE and BSE can typically be bought and sold during market hours (9:15 AM to 3:30 PM IST on weekdays) almost instantaneously, at transparent prices visible to all market participants. This liquidity is underpinned by market makers, high-frequency traders, and the large number of buyers and sellers participating in the market each day.

Equity in Corporate Finance: A Broader Perspective

Beyond individual investors trading shares on a stock exchange, equity plays a critical role in the way corporations are structured, financed, governed, and valued. Understanding equity from a corporate finance perspective enriches the investor's ability to analyse businesses.

Equity as the Foundation of Corporate Governance

Equity shareholders are, legally speaking, the owners of the company. This ownership confers rights - voting rights, rights to information, rights to attend general meetings, and rights to challenge decisions that prejudice shareholder interests. In India, the Companies Act, 2013 and SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations establish an extensive framework for shareholder rights and corporate governance. The board of directors is appointed by and accountable to shareholders. Independent directors are mandated to protect minority shareholders' interests.

SEBI has taken an active role in strengthening corporate governance standards for listed companies - requiring regular financial disclosures, mandating independent audit committees, and ensuring that related party transactions are conducted at arm's length and approved by shareholders. For investors, understanding governance quality is as important as understanding financial performance.

Equity Dilution

When a company issues new shares - whether through a follow-on offering, a rights issue, an ESOP exercise, or a conversion of convertible instruments - the existing shareholders' percentage ownership decreases. This is called equity dilution. If the new shares are issued at a price below the prevailing market price (as is often the case in rights issues), the intrinsic value per share also decreases. Dilution is not inherently bad - if the fresh capital is deployed productively and earns a return above the cost of capital, it can ultimately enhance shareholder value. But dilution that merely funds losses or inefficient expansion destroys value.

Return on Equity (RoE) as a Performance Metric

Return on Equity (RoE) - Net Profit ÷ Average Shareholders' Equity × 100 - is one of the most widely used metrics in fundamental analysis. A high and sustained RoE indicates that management is generating strong returns on the capital entrusted to it by shareholders. Warren Buffett, perhaps the world's most celebrated equity investor, has long emphasised RoE as a key criterion. In the Indian context, sectors like information technology and fast-moving consumer goods have historically demonstrated high RoE, while capital-intensive sectors like infrastructure or utilities often show lower RoE due to their large asset bases.

The DuPont Analysis of RoE

The DuPont framework decomposes RoE into three components: Net Profit Margin (profitability), Asset Turnover (efficiency), and Financial Leverage (use of debt). This decomposition helps investors understand the source of a company's RoE - whether it comes from high profit margins, efficient asset use, or simply from taking on large amounts of debt. A high RoE driven primarily by leverage is more fragile and risky than one driven by genuine operational efficiency.

Equity Buybacks

A share buyback (or repurchase) is when a company uses its own cash to buy back shares from the open market or through a tender offer. This reduces the number of shares outstanding, increasing earnings per share and book value per share for remaining shareholders. Buybacks are often seen as a signal of management's confidence in the company's future prospects and are sometimes used when the management believes shares are undervalued. In India, buybacks are regulated by SEBI and the Companies Act.

How to Start Investing in Equity in India: Practical Steps

For someone new to equity investing in India, the process can seem daunting. But the regulatory framework and market infrastructure in place today make it simpler and safer than at any point in history. Here is a practical overview of how retail investors can begin their equity journey.

Step 1: Understand Your Risk Profile

Before investing a single rupee in equity, honestly assess your financial situation, investment goals, and risk tolerance. How long can you stay invested? Can you withstand a 30% drop in the market without panic-selling? Do you have an emergency fund in place? Equity is most suitable for long-term goals (typically 5 years or more) and for money you do not need in the near term.

Step 2: Open a Demat and Trading Account

To hold and trade equity shares in India, you need a Demat account (to hold shares electronically) and a Trading account (to place buy and sell orders on the exchange). Both are typically offered together by stock brokers registered with SEBI. Opening these accounts involves KYC (Know Your Customer) verification - submitting identity proof, address proof, bank details, and a recent photograph, along with your PAN card, which is mandatory. Flattrade, for instance, is a SEBI-registered stock broker through which investors can open these accounts and trade on the NSE and BSE.

Step 3: Link a Bank Account

Your trading account must be linked to a bank account for seamless fund transfers. When you buy shares, funds are debited from your bank account; when you sell, proceeds are credited back.

Step 4: Research and Select Investments

Once your accounts are active, you can begin researching companies. Fundamental analysis - examining financial statements, competitive positioning, management quality, sector dynamics, and valuation - helps identify companies worth investing in. Technical analysis - studying price charts and market indicators - can assist in identifying entry and exit points. Always rely on credible sources of information: company filings on the NSE/BSE website, SEBI filings, annual reports, and reputable financial publications.

Step 5: Place Orders and Monitor

You can place equity orders through your broker's online platform or mobile app. For long-term investors, delivery-based trading - where you actually take ownership of the shares in your Demat account - is the relevant mode. Monitor your portfolio periodically, but avoid over-trading driven by short-term market noise.

Step 6: Stay Informed on Tax and Compliance

Keep track of your buy and sell transactions for tax reporting purposes. Equity gains are taxable, and you must declare them in your Income Tax return. Stay updated with SEBI regulations and any changes in tax law introduced in successive Union Budgets.

Remember: Past performance of any equity investment does not guarantee future results. Equity investing involves risk, including the risk of loss of principal. Consult a SEBI-registered investment adviser if you need personalised advice.

Example

Key benefits

How it works

1. 1
   Company Issues Shares

   A company creates equity by issuing shares - either to private investors in early stages or to the public through an IPO regulated by SEBI - raising capital in exchange for ownership stakes.

2. 2
   Shares Are Listed on an Exchange

   Once listed on the NSE or BSE, the company's shares can be freely bought and sold by investors during market hours, with prices determined by supply and demand.

3. 3
   Investor Opens Demat and Trading Account

   A retail investor opens a Demat account (to hold shares electronically with NSDL or CDSL) and a Trading account with a SEBI-registered broker to place buy and sell orders.

4. 4
   Buying Equity Shares

   The investor places a buy order through the broker's platform; once matched with a seller on the exchange, the transaction is settled and shares are credited to the investor's Demat account, typically within T+1 trading days.

5. 5
   Earning Returns

   The investor earns returns in two ways: dividends declared by the company (credited to the investor's bank account) and capital appreciation when the share price rises above the purchase price.

6. 6
   Selling Equity Shares

   When the investor decides to exit, a sell order is placed through the broker; upon settlement, the shares are debited from the Demat account and the proceeds are credited to the investor's linked bank account.

7. 7
   Tax Reporting and Compliance

   The investor must account for capital gains (STCG or LTCG depending on holding period) and dividend income in their annual Income Tax return, as per the provisions of the current Finance Act.

Formula

Shareholders' Equity = Total Assets − Total Liabilities
Return on Equity (RoE) = (Net Profit ÷ Shareholders' Equity) × 100

Key takeaways

Frequently asked questions

Related terms